Canada in a ‘structural productivity crisis’: Economists react to second BoC rate cut

Warren Lovely, managing director, chief rates and public sector strategist at National Bank Financial, joins BNN Bloomberg to discuss the latest BoC rate decisi

It is clear that Canada is in a ‘structural productivity crisis’ and has been for at least a decade, said a chief public strategist after the Bank of Canada cut rates for a second consecutive term.

On Tuesday, the central bank dropped its key interest rate to 2.25 per cent. Governor Tiff Macklem said trade uncertainty, U.S. tariffs and inflation have weakened the Canadian economy.

“There’s nothing to cheer about here,” Warren Lovely, managing director with National Bank Financial, told BNN Bloomberg.

“I think we’re lowering interest rates because the economy is under immense strain.”

Lovely said the federal government needs to focus on productivity growth.

“We’ve really been kind of a hamster in a wheel in terms of generating more output per worker hour,” said Lovely.

The bank projects Canada’s GDP to grow by 1.2 per cent in 2025, about 1.1 per cent in 2026 and 1.6 per cent in 2027. It also said “excess capacity in the economy is expected to persist and be taken up gradually.”

“Lackluster is exactly how I would characterize Canadian prospects here until we get some certainty on trade, which, to be honest, I’m not sure we’re going to get in the near term,” said Lovely.

He said the bank reduced the rate to the lower end of the neutral rate of interest range which suggests the economy needs monetary stimulus because the labour market is weak, the export outlook is suffering and the industrial sector is facing multiple tariff cuts.

“We could well be in a situation of being in a technical recession at this point,” David Macdonald, senior economist with the Canadian Centre for Policy Alternatives told CTV News.

Interest rates cannot fix the damage

Macklem has already said the central bank cannot fix the “damage” caused by the trade war with the US.

In the short term, Lovely said, the Bank of Canada needs to be the driver of stimulus for this underperforming economy.

“There is clearly sectoral damage. There’s damage to businesses, to workers. Governments need to be reacting to that, protecting those vulnerable sectors,” said Lovely.

The rate cut on Tuesday had an explicit easing bias, Jason Daw, head of North American rates strategy at RBC Capital Markets told BNN Bloomberg.

“You really have to have the economic data being probably materially weaker than what we’ve seen over the past three to six months, in order for them to be willing to cut again,” said Daw.

Federal budget to provide clarity

Lovely said the federal budget is meant to give Canadians clarity on the road ahead.

“Let’s be honest here, you don’t fix a multi year, maybe decade long, productivity crisis with one silver bullet, and you certainly don’t do it in one or two quarters. So let’s be a little patient here,” said Lovely.

He said the private sector has already lost confidence in the federal government, and the country is dependent on the U.S. He said Canada needs to have a resource and high tech strategy to create some economic activity.

But there is some room for optimism said Daw.

He said tariff and trade effects had isolated effects on the economy.

“We have the budget next week, it is going to be stimulative. The degree of how much that is, is an open question, but that is going to help the GDP growth profile in 2026 and 2027,” said Daw.